As global markets continue to tread water, a common mistake is placing undue importance on short-term forecasts, rather than focusing on fundamentals. Importantly, times of uncertainty can create the greatest of opportunities for patient investors. As such, now could be a good time to look for quality businesses selling at affordable prices.
While it can be difficult to peer through the mist, a company of true quality will endure through the cycle, and likely thrive in the recovery.
Throughout times of general market activity, companies with the ability to compound over a long period will often sell at excessive prices in relation to present earnings. For reference, we have listed a few below.
Clearly, people can see the value in holding these investments when the outlook looks generally favourable, or at least not negative. However, to further demonstrate the power of holding companies that can compound their earnings over time, we illustrate the potential of two investments with present earnings of $10m yet set to grow at a different pace.
Company A
10 Years compounding earnings at 5% - cumulative earnings $132,068
Company B
10 Years compounding earnings at 14% - cumulative earnings $220,445
It's also important to remember that this equation is only possible if both companies re-invest all their earnings. Stated another way, if you opt for a cash dividend, the money that you receive will either be consumed or likely compounded at a lower rate.
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